Fidelity Argues That S&P 500 Is Still Reasonably Priced

The S&P 500 (INDEXSP:.INX) has just crossed 2000 for the first time in its history, and while the milestone may be arbitrary it has given investors a reason to reconsider whether they think stocks are reasonably priced in light of the country’s weak economic recovery alongside a five-year bull market. But Fidelity growth manager Sonu Kalra argues that prices could keep going up for years and that it’s still a good time to buy stocks.

S&P 500 valuation remains pretty close to historical norms

“Valuation remains pretty close to historical norms, above the historical average but not dramatically above it,” says Kalra. “The U.S. economy continues to grow at a slow but steady pace and, historically, bull markets have ended with a slowdown in the economy. But given that we are in the fifth year of a bull market, I do think you need to be selective about what you own and look for real opportunities.”

While US economic growth hasn’t been impressive over the last few years, Kalra points to the 4% growth we had in the second quarter following a miserable winter as a sign that stronger growth will keep corporate earnings moving. And since profits are up six-fold in the S&P 500 since 2009 while earnings are up just 23%, something Kalra attributes to better operations, he sees a lot of that growth falling to the bottom line.

He also says that stronger hiring, an improving housing market, and falling domestic energy prices should all give investors confidence that we’re nowhere near the next slowdown. With an average PE ratio of 17 (presumably forward earnings, though he doesn’t specify), compared to a historical average of 15, he argues that the combination of slightly elevated prices for very high profit margins is a good deal.

S&P 500: Fidelity’s arguments won’t sway the bears

But none of this is likely to persuade bears that this is a good time to invest. Kalra’s argument that the housing market is improving may have left you scratching your head, and stronger hiring with stagnant wages is good but not great. Whether the strong GDP growth we had last quarter was a real change of pace or mostly a combination of inventory build and rebound from 1Q we’ll have to wait to find out, but it seems dangerous to assume the former.

As for the sky-high profits margins, assuming that they will stay that high doesn’t leave investors with much margin for safety. The only point where you’re likely to find broad agreement is that five years into the bull market, it’s good to be cautious about what you own.